10 Things I Learned While Trading for Victor Niederhoffer

I traded for Victor Niederhoffer for about a year starting in 2003. I was up slightly more than 100% for him, primarily trading futures using a quantitative approach. During that period I had one down month: June 2003.

Victor was a top trader for George Soros before starting his own fund in the ’90s and then writing the classic investment text “Education of a Speculator.” He then suffered one of several blowups in his career when his fund crashed to zero while on the wrong side of a couple of bets during the Asian currency crisis in 1997 (most notably, he was short S&P puts when the market crashed that year).

Despite that, Victor has consistently traded his own portfolio quite successfully and is one of the best traders I’ve seen in action. He still posts his daily comments on trading and the markets at his site dailyspeculations.com.

Here are 10 things I learned during my time trading for Victor:

1.) Test, test, test.

Test everything you can. If someone says to me, “There’s inflation coming so you better short stocks,” I know right away the person doesn’t test and will lose money.

Data is available for almost anything you can imagine. (In my talks, I always discuss the “blizzard system” based on data of what the stock market does depending on how many inches of snow have fallen in Central Park that day).

Victor and his crew would spend all day testing ideas: What historically happens to the market on a Fed day? What happens on options expiration day if the two prior days were negative? Do stocks that start with the letter “x” outperform? Nothing was beyond testing.

2.) Optimism.

There’s plenty of reasons every day to assume the world is going to end. The media is constantly speculating about imminent financial collapse, hyperinflation, peak oil, pandemics, terrorism, etc.

One of Victor’s favorite books, which I highly recommend, is “Triumph of the Optimists,” which shows the success of the U.S. markets over the past century over other markets and asset classes.

Yes, the markets take a hit. But invariably buying dips (and being careful not to get wiped out) will be a long-term strategy for success.

3.) Fearlessness.

I had a big March 2003 trading for Victor. The market was threatening to go to new lows at the advent of the Iraqi war. I

went long and strong and had a great month. Then, for the rest of the year, for fear of destroying a great track record, I would go up a few percentage points at the beginning of each month and then coast for the rest of the month, probably leaving another 100% or so on the table as I passed on trading many high probability situations.

I always suspected Victor was very disappointed in me for that. When you have a high probability situation, trade it and trade it big.

4.) Everything Is Connected.

Whether you are studying baseball, checkers, trees, wars – all contain patterns similar to the patterns we see every day in trading. Sometimes the best way to get perspective on your trading is to study something seemingly unrelated and to then consider the analogies.

5.) Ayn Rand.

There’s a lot of retrospectives right now about Rand, one of Victor’s favorite authors. I don’t care much for the so-called Objectivism or Rand’s views on capitalism, but what struck me about her books was the emphasis on competence.

Her novels are about competence and the personal gratification one gets by being good at what you do, whether it’s building railroads, designing a building, trading or cleaning a house.

6.) Warren Buffett.

Victor is not a fan of Warren Buffett. This forced me to look at Buffett in a whole new way. Is Buffett a value investor? What other tricks of the trade has Buffett used over the years? I ended up reading every biography of Buffett, going through four decades of SEC filings, and pouring over not only his Berkshire letters but his prior letters from his hedge fund days (1957-1969). The result was my book, “Trade Like Warren Buffett.”

7.) The First Day of the Month.

It’s probably the most important trading day of the month, as inflows come in from 401(k) plans, 1RAs, etc. and mutual fund have to go out there and put this new money into stocks. Over the past 16 years, buying the close on SPY (the S&P 500 ETF) on the last day of the month and selling one day later would result in a successful trade 63% of the time with an average return of 0.37% (as opposed to 0.03% and a 50%-50% success rate if you buy any random day during this period).

Various conditions take place that improve this result significantly. For instance, one time I was visiting Victor’s office on the first day of a month and one of his traders showed me a system and said, “If you show this to anyone we will have to kill you.”

Basically, the system was: If the last half of the last day of the month was negative and the first half of the first day of the month was negative, buy at 11 a.m. and hold for the rest of the day. “This is an ATM machine” the trader told me. I leave it to the reader to test this system.

8.) Always Protect the Downside.

This is learned by negative example. As Nassim Taleb has pointed out ad nauseum, Black Swans occur. (See the Malcolm Gladwell article on Taleb to see Taleb’s thoughts on Victor.)

No matter how much you test, there will be a “this time is different” moment that will force your bank account into oblivion. I trade a strategy based on selling puts and calls at levels where my software thinks its statistically unlikely the market hits those levels before the next options expirations day.

But I also use some of the premium I earned from selling those puts and calls to buy slightly further out puts and calls as insurance the market doesn’t run away from me. No matter how confident the software is, always protect.

9.) Keep Life Interesting.

Victor surrounds himself by games and the people who enjoy them. When I knew him, he took regular checkers lessons, played tennis every day, and has some of the oddest collections I’ve ever seen.

He stands out on a crowded city street and seems to spend part of each day seeking out new and interesting experiences. He often asked me what I’d been reading and if it was trading related he was disappointed.

Trading is ultimately a window into the psyche of the world at that moment. Uncovering the nuances of that psyche is ultimately more important than doing the latest test on what happens after a Fed announcement (but, on that point, tests have shown that whatever the market is doing before a 2:15p.m. Fed announcement on Fed days, chances are it will reverse after 2:15).

10.) Be Open to New Ideas.

In 2002, I was still reeling from the dot-com collapse. I had sold a company near the height of the insanity in 1998 and also started a VC fund that opened up doors in March, 2000, the absolute peak of the market. I was trying to figure out new things to do. I came up with a list of about 30 people I looked up to and came up with 10 ideas for each person about how they could improve their business. To Victor, I sent a series of trading ideas that I had both backtested and had traded successfully. To Jim Cramer, I sent a list of 10 ideas for articles he should write. Of the 30 people, they were the only two who responded and ultimately I ended up managing a little bit of money for Victor and writing for Jim Cramer’s site, thestreet.com. I’m grateful for the opportunities that both people created for me.

Interesting article – but what remains unexplained about Victor is why he didn’t follow a few of the key ideas that you outlined here – particularly “protect to the downside.” How did he blow up not once, but twice (or was it three times)? Why didn’t he learn from his own mistakes? Why did he repeatedly show a lack of competence given his love of competence? Was it ego? A blind spot?

I say all this without any disrespect – Victor is a star in the fund world even with his blowups. I’m just curious as to why a man who seemed to be so apparently competent could blow up so badly. I’d be very curious as to your ideas on this since you worked for him.

thats a great question and at the end of the day, I think only Victor can answer it. I think he knew what he was doing every step of the way but was primarily hoping he would the period where risk management was not needed would last longer than he needed to be in the business. But who knows? He’s an eccentric genius and its hard to interpret those sorts of people.

Chuck

from what i heard is that he’s a great short term trader, but not such a good swing trader. A lot of people have trouble with their timeframes and understanding this is essential imho

Steven Goff

Roy > “I just made a 12 on the last hole of THE U.S Open”……”Nobody is going to remeber who won The open Roy”…..”But they will never forget your 12″…..It was…it was….infamous”

zzen321

Good read (just reading this now, as a new fan), The Gladwell article on Taleb was really excellent also (minor typo as igon value is really eigenvalue I think?) … thanks.

willy

I started /Dow 12,000.com and because I did not get on CNBC people thought I was a nut.
Now I sae up to 13,0000…Pearls Before Swine?

Interesting. I decided to avoid Niederhoffer as a model after reading his first book. I could sense that he had risk mgmt (/psychological) issues that could lead to another blow-up. When it comes to traders I wonder if it is worth trying to draw positive lessons from those who blow up versus just choosing better models. For me, your number 8 is the only one that matters from him, imho.

Interesting. I decided to avoid Niederhoffer as a model after reading his first book. I could sense that he had risk mgmt (/psychological) issues that could lead to another blow-up. When it comes to traders I wonder if it is worth trying to draw positive lessons from those who blow up versus just choosing better models. For me, your number 8 is the only one that matters from him, imho.

Me

““If you show this to anyone we will have to kill you.” Basically, the system was:”

I told you, long time ago, never f with me, you f*cking monkey.

YourLaziness

Me?

Me

““If you show this to anyone we will have to kill you.” Basically, the system was:”

If the last half of the last day of the month was negative and the first half of the first day of the month was negative, buy at 11 a.m. and hold for the rest of the day. “This is an ATM machine” the trader told me. I leave it to the reader to test this system.

Reading your post is always a delight. I would love to test the theory. However, where can I find historical minute data without paying an arm and a leg?

I like your #3 “everything is connected”. I believed this even when I was 18 and started trading mutual funds (2000’s). You don’t have to know qualitative math to see that there are real patterns happening everyday and to use them to your advantage when everything aligns in your favor. Good post.

I’m glad I found this site. I saw that kind of nerdy looking guy in the 7 traders stock draft pick thing on CNBC, then googled him, haha! This is good stuff though!

George

“If you show this to anyone we will have to kill you.” Basically, the system was: If the last half of the last day of the month was negative and the first half of the first day of the month was negative, buy at 11 a.m. and hold for the rest of the day. “This is an ATM machine” the trader told me. I leave it to the reader to test this system.

— I tested this system with ES data from 2005 September to July 2012. I defined ‘last half ‘ of last day of the month using different time combinations viz. from 11 to 4 EST, 2pm to 4pm EST, 230 pm to 4pm EST and 3pm to 4pm EST. I used first half of the first day of the month as 930 to 1100EST. So, if both these time windows was negative, Buy ES at 1100EST and exit at 4pm EST. Pathetic results in all the cases. Either victor’s traded fooled you or this behavior has changed since he showed you the results.

j slay

then don’t buy at 11:00 a.m. , go short. and don’t tell anyone or I will have to kill you!

of course Buffett wasn’t a value investor or a saint. of course James Altucher is a PURE, UNADULTERATED self help author(no matter his claims to the contrary). And the market when Buffett traded was vastly different. And Victor Niederhoffer blew up badly. And Nassim Taleb’s trading strategy of losing money for years and then making a killing is not for the average investor.

People, ignore all stock market experts and gurus, and index your money if it comes to it.